The creation of a dedicated electronic agency trading unit by bond heavyweight JP Morgan looks set to accelerate similar plans by rivals, as tighter capital rules continue to make banks rethink their trading operations.

It emerged last week that JP Morgan, one of the largest fixed income dealers, had created a unit to offer agency-based electronic trading across multiple asset classes. It makes it by far the biggest trader of bonds to set up a dedicated agency trading unit.

Radi Khasawneh, a fixed income analyst at Tabb Group, said that “more than a few are thinking on the same lines” as JP Morgan.

Another person added that one bank has spent up to $100 million on leveraging its prime services infrastructure to create an agency credit platform, and is considering outsourcing it to other banks.

The move is a significant shift for the fixed income market, where the ability of dealers to act as principal, holding an inventory of bonds to trade with customers, has been critical. However, tougher capital requirements are increasing charges on bank inventory and the promotion of electronic trading is making fixed income markets more equity-like. This is promoting a shift to agency trading, where banks serve as matchmakers.

But this may reduce liquidity, which is already low for most corporate bonds.

Nomura is putting in place an electronic strategy across its global markets division, which covers equities, fixed income, FX, rates and credit, that may be formalised as early as next month, a person familiar with the situation said.

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In an influential report last month, consultancy McKinsey said that several buyside firms had identified Credit Suisse and UBS as having “laid a strong foundation” for their agency franchises.

UBS has been building an agency offering for bonds as part of its Neo multi-asset class electronic trading platform for three years, although it is not among the top five for fixed income market share.

Chris Murphy, global co-head for FX, rates and credit at UBS, said: “We’ve been of the view for some time now that the fixed income markets will move to agency-type protocols and electronic means of transactions. We are getting great traction with clients trading agency through our platforms so we aren’t surprised to see others start to come to the same sort of conclusions we did over three years ago.”

Murphy said the bank was “very open” to outsourcing the platform, particularly to regional banks.
In its report, McKinsey said that some “principal-driven flow monsters” would develop an agency business to diversify their franchise, and added that “a few have already moved well beyond the stage of dipping their toes into the agency pond”.